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Transcript of Merch_6 Six Months
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Merchandise Plan:It is a financial plan allocating specific amounts of
money to each department/division for the purchase
of an appropriate assortment of fashion merchandisethat will meet consumer demand & sales goals.
Six month merchandising plan
Dollar Plan
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The goal of a business plan is to minimize theuse of capital and maximize profit. This can bedone with the help of merchandise plan.
The merchandise plan consists of two majorelements:
An estimation of merchandise needed
A control method to regulate stock levels
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Elements of the merchandise plan
Planned sales Estimates for each month and the period
Planned stock
Estimated inventory need at the beginning of eachmonth
Planned markdowns Estimated inventory reduction for each month
Planned purchases: Estimated purchase budget to be spent during a
given period.
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Since a plan is a set of financial goals, itmay include planned figures for:
Workroom cost
Cash discount
Season stock turnover
Shortage
Average stock
Markdown percentage of initial markon
Newspaper advertising
Gross margin percentage
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Merchandise Planning is "A systematic approach. It is aimed at maximisingreturn on investment, through planning sales and inventory in order to increaseprofitability. It does this by maximising sales potential and minimising lossesfrom mark - downs and stock - outs."
It is a "systematic approach" in many ways. You need the systems to ensure
that you have the right people, the right processes and the right computerisedsupport. Without the people and processes you will get nowhere.
It is "aimed at maximising return on investment", but where is this investmentmade? Most obviously we are talking about a financial outlay in stock, but lessevidently there is also considerable financial investment in retail space, peopleand corporate infrastructure.
We achieve the goals "through planning sales and inventory". Thesetwo elements are inextricably linked and finding an optimum balance isthe key to retail success.
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We put the effort into Merchandise Planning "in order to increase profitability".Profitability is the key driver of most businesses. Effective merchandise planningdelivers margin increases directly to the bottom line. We achieve the increase inprofitability "by maximising sales potential and minimising losses from mark -downs and stock - outs".
There are two major areas of profit leakage in retail. Firstly lost sales resulting from
lack of stock and secondly forced margin reductions due to excessive stock.
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This process of Merchandise Planning begins with the
formulation of objectives, setting of policies and
implementation of procedures necessary to carry out dept. /
store objectives.
It includes both
Cash planning in terms of Merchandise budgets
Unit planning in terms of Merchandise lists
Merchandise Planning
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Six-month merchandise plan
Successful retail working requires the right merchandise assortment.
To achieve this, the following variables must be planned at least 6 months
in advance.
Receipt Plans
Sales Plan
Mark-up Plans
Mark-down Plans
Inventory shortages
EOM Stock levels
Weeks Supply
Gross MarginsProfits
This plan is called the merchandise budget & it forecasts specific
merchandising activities for a dept. or store for a specified period of time.
This merchandise budget is also referred to as the six-month merchandiseplan.
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WHY IS PLANNING IMPORTANT??
Complex business environment
Stock-outLoss of Sale
OverstockingDead stock
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The Planning Process
Planning is based on 3 components:
Objectives : the goal towards which the management
activities of the business establishment are directed.
Policies: provide management with a frame of reference for
decision making that is consistent with planned objectives
they provide guidelines for dealing consistently with
problems & issues.Procedures: are necessary steps that must be followed to
execute a given policy. Management must emphasize if the
procedure is a rule / guide.
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Cash Disbursements
Cash Receipts
Credit
Expenses
oDirect: paid out directly for the dept.s benefit. E.g. salary,
advertising, promotions, special events.oIndirect: that serve the whole store. E.g. electricity, rent, taxes,
insurance etc.
Dept. Sales 20,000
COGS - 14000
Total 6000
Direct Expenses -4000
Total 2000(indirect ex + profit)
Variables of record-keeping
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Sales
Purchases
Stocks & Inventories
Profit & Loss Statement / Income Statement / Operating
Statement
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Key factors P & L
Net Sales = Gross Sales - Returns &Adjustments
Total Cost of
Purchases =Op. Inventory
(cost)+ Purchase
(cost)
Shipping
(cost)
+
Net Cost of
Goods Sold=
Total Cost
of Purchases- Closing Inventory
(Cost)= Gross COGS -
Cash Discount
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Gross
Margin
Net Sales Net COGS
Total Operating
Expenses
Direct
Expenses
Indirect
Expenses
Net ProfitGross
Margin
Total Operating
Expenses=
=
= -
+
-
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Procedure for preparing the six monthmerchandise plan
Buyers role
Elements of plan
Planning sales
External factors Internal factors
Fashion trends
Planning stocks
Stock-sales ratio Stock turnover rate
Markdowns
Purchases
Open-to-buy
Markup Gross margin
Cash discount
Stock shortages andoverages
Operating expenses
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Planned Sales
Factors:
Economic climate
Enlargement of departments
Elimination of price points Scheduled promotional activities
The proper market strength
Any change in competitive situation
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Planned Stock
Guidelines to balance stock to sales:
Stock turnover
Stock/sales ratio
Faster the stock turn greater is the profit
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Stock turnover
Every department has its own stock turnoverrate.
planned sales(for a period)
= Stock turnover
Planned average Inventory(for the period)
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Stock/Sales ratio
Retail stock (as of a specific date)
= stock/sales
ratioSales for a given period(a month)
In monthly stock-sales ratio the period will be ofa month
Calculations on page 183 13-20
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Retail Inventory method
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Page 184/185/186
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Six month merchandise plan
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Six month merchandising plan in action
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Control System
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Calculate the profit
Tic-tac-toe
13-26
Net sales cost ofgoods sold
= gross margin -expenses
= profit
$ %
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Methods used for Planning
Top-down:Planning of overall sales based oneconomic trends, external conditions & changes in storepolicies. The sales goals thus set are further brokendown for departments.
Bottom-up:initial planning is done by peopleresponsible for actually implementing the plans.
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Types of Merchandise Management Systems
Staple Merchandise
Predictable Demand
Relatively Accurate Forecasts
Continuous Replenishment
Fashion Merchandise
Unpredictable Demand
Difficult to Forecast Sales
Merchandise Budget Plan
Open-to-Buy
The McGraw-Hill Companies Inc./Ken Cavanagh PhotographerTheMcGraw-HillCompanies,Inc./LarsA.Niki,
photographer
C t ti f St k T
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Computation of Stock Turnover orInventory Turnover
Stock TurnRetail Basis
Stock TurnCost Basis
Stock TurnUnit Basis
=
=
=
Net SalesAvg. Stk atRetail Price
Cost ofGoods Sold
Avg. COGS
No. of UnitsSold
Avg. No. ofunits in stock
1
2
3
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Methods to increase Stock Turnover
Reducing the no. of price lines carried.
Limiting the no. of brands carried.
Reducing duplicate styles.
Carrying smaller reserve stocks. Avoiding accumulation of unsaleable goods.
Eliminating unsaleable goods.
Closely following the buying plan.
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Factors affecting rate of Stock Turn
Different lines of merchandise have differentrates of stock turn. E.g. Food Vs Apparel
Type of Retail Institution. E.g. Discount Store VsPremium EBO
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Planned Reductions
Allowance for the difference between the originalretail value & actual final sales value of themerchandise.
It consists of 3 factors:
Merchandise Shortage/Overages
Employee Discount
Markdowns
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Merchandise Shortage
It is the diff. between the book inventory & thephysical inventory when the book inventory islarger.
Special attention should be paid while inwarding
stocks or transferring stocks.
Merchandise Overage
It is the diff. between the book inventory & the physical inventory whenthe physical inventory is larger.
This is generally due to error in physical count.
E l Di t & Di t f Oth
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Employee Discounts & Discounts for OtherSpecial Groups
It is the price reduction granted to storeemployees.
They are also granted to some groups like
charitable institutions / bulk corporate orders etc.
Markdown & Markdown %
Reduction in price from original retail price is called Markdown.
Markdown = Original Markdown Price Markdown Price
Markdown % = Net Markdown
Net Sales* 100
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Why Markdowns are needed?
To clear slow selling merchandise.
To attract customers to the stores whichultimately results in sale of regular merchandise.
Errors are generally of two types:
Buying errors
Pricing errors
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Markups
Buyer sells merchandise at a price that will cover thecost of goods & the expenses incurred for acquiring thegoods & thereby also yield profit.
Markup = Retail Price Cost Price
Following Information is crucial for planning mark-ups: Total amount of sales for the season
Planned expenses
Planned reductions
Profit goal for the season
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Markups
For planning initial markups the buyer mustconsider the following: Covering costs & expenses & making profits
Consumer demand
Store clientele Kind of merchandise
Type of Retail
Competition
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Markup = Retail Price Cost Price
Markup% at Retail = Markup/ Retail Price
Initial Markup = Retail Price Cost Price
Maintained Markup = Final Retail Price Cost Price
Markups
Six Month Merchandise Plan
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Six Month Merchandise Planfor Mens Casual Slacks
Monthly Sales Percent Distribution to Season
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Monthly Sales Percent Distribution to Season(Line 1)
1. Sales % Distribution to Season6 mo. data April May June July Aug Sept
100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%
The percentage distribution of sales by month is based on
Historical data Special promotion plans
Monthly Sales Percent Distribution to
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Monthly Sales Percent Distribution toSeason (Line 1) Continued
Retail sales are very seasonal. The Christmas seasonoften accounts for more than 40% of a retailers annualsales.
Monthly Sales
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Monthly Sales(Line 2)
Sales % Distribution1. Month 6 mo. data April May June July Aug Sept
100.00% 21.00% 12.00% 12.00% 19.00% 21.00% 15.00%2. Mo. Sales $130,000 $27,300 $15,600 $15,600 $24,700 $27,300 $19,500
Monthly sales =the forecasted total season for the six-month period x monthly sales %
Monthly Reductions Percent Distribution
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Monthly Reductions Percent Distribution(Line 3)
3. Reduction % Distribution to Season
6 mo. data April May June July Aug Sept100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%
To have enough merchandise every month to support themonthly sales forecast, buyers need to consider factorsthat reduce the inventory level in addition to sales made
to customersMarkdownsShrinkageDiscounts to Employees
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Shrinkage
Inventory loss caused by shoplifting, employee theft,merchandise being misplaced or damaged and poorbookkeeping.
Retailers measure shrinkage by taking the differencebetween
1. The inventory recorded value based on merchandisebought and received
2. The physical inventory actually in stores and distributioncenters
Shrinkage % = $ shrinkage
$ net sales
Monthly Reductions
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Monthly Reductions(Line 4)
Reduction % Distribution3. Month % 6 mo. data April May June July Aug Sept
100.00% 40.00% 14.00% 16.00% 12.00% 10.00% 8.00%4. mo.
reductions $16,500 $6,600 $2,310 $2,640 $1,980 $1,650 $1,320
Monthly Reductions = Total reductions x Monthly reduction %
Beginning of Month (BOM) Stock-to-Sales
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Beginning of Month (BOM) Stock-to-SalesRatio (Line 5)
5. BOM Stock to Sales Ratio6 mo. data April May June July Aug Sept
4.0 3.6 4.4 4.4 4.0 3.6 4.0
Stock-to-Sales Ratiospecifiesthe amount of inventory (in retaildollars) that should be on hand at the beginning of the month to
support the sales forecast and maintain the inventory turnoverobjective for the category
Retails often use a related measure, Weeks of Inventory
Steps in Determining
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Steps in Determiningthe Stock-to-Sales Ratio
Step 1: Calculate Sales-to-Stock Ratio
GMROI = Gross margin% x Sales-to-stock ratio
Sales-to-Stock Ratio = GMROI/Gross margin %
Assume that the buyers target GMROI for the
category is 123%, and the buyer feels thecategory will produce a gross margin of 45%.
Sales-to-Stock Ratio = 123/45 = 2.73
Steps in Determining
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Steps in Determiningthe Stock-to-Sales Ratio Continued
Step 2: Convert the Sales-to-Stock Ratio toInventory Turnover
Inventory Turnover = Sales-to-stock ratio x (1 GM%/100)
Inventory Turnover =2.73 x (1 45/100) = 1.50
Steps in Determining
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Steps in Determiningthe Stock-to-Sales Ratio Continued
Step 3: Calculate Average Stock-to-Sales Ratio
Average Stock-to-Sales Ratio= 6 months/Inventory turnover
= 6/1.5 = 4
Steps in Determining
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Steps in Determiningthe Stock-to-Sales Ratio Continued
Step 4: Calculate Monthly Stock-to-Sales Ratio
Monthly stock-to-sales ratios vary in the opposite directionof sales
To make this adjustment, the buyer considers theseasonal pattern, previous years stock-to-sales ratios
BOM Stock
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BOM Stock(Line 6)
6. BOM Inventory6 mo. data April May June July Aug Sept
98280 98280 68460 68640 98800 98280 8000
BOM Stock
= monthly sales (line 2) x BOM stock-to-sale ratio (line 5)
= $27,300 x 3.6
= $98,280
End-of-Month (EOM) Stock
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End of Month (EOM) Stock(Line 7)
7. EOM Inventory6 mo. data April May June July Aug Sept
85600 68640 68460 275080 98280 78000 65600
The BOM stock for the current month = the EOM stock inthe previous month
Monthly Additions to Stock
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Monthly Additions to Stock(Line 8)
8. Monthly additions to stock6 mo. data April May June July Aug Sept
113820 4260 17910 48406 26180 8670 8420
Additions to stock
= Sales (line 2) + Reductions (line 4) + EOM Stock (line 7)
BOM Stock (line 6)Additions to stock (April)
= $27,300 + $6,600 + $68,640 - $98,280 = $4,260
E l i h M h di B d Pl
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Evaluating the Merchandise Budget Plan
Inventory turnover GMROI, sales forecast areused for both planning and control
After the selling season, the actual performance
is compared with the plan Why did performance exceed or fall short of the plan?
Was the deviation from the plan due to somethingunder the buyers control?
Did the buyer react quickly to changes in demand byeither purchasing more or having a sale?
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Open-to-Buy System
The OTB system is used after the merchandise ispurchased
Monitors Merchandise Flow
Determines How Much Was Spent and HowMuch is Left to Spend
PhotoLink/Getty Images PhotoLink/Getty Images
Wh t I O T B Pl i ?
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What Is Open To Buy Planning?
The goal of good inventory management is to maintainan appropriate level of inventory for the amount of salesthat you are generating.
You want to have adequate assortments when sales areslow so that you dont miss possible sales, but not somuch that you drain your cash flow.
When sales pick up, you want to increase your inventorylevels to support the increased sales, but be careful notto over buy
O t B S t
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The Right Amount
Of the Right Stuff
At the Right Time
This is where Open To Buy planning comes into play.
It helps the buyer to decide how much inventory should be on handat the beginning of any given month and how much newmerchandise should be received during the month to maintain your
optimum inventory levels.
Open-to-Buy System
All ti M h di t St
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Allocating Merchandise to Stores
Allocating merchandise to stores involves threedecisions:
how much merchandise to allocate to eachstore
what type of merchandise to allocate
when to allocate the merchandise to differentstores
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